VATís coming? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

VATís coming?

May 19, 2003

One of then most prominent policy decisions that the government announced in Budget 2003-04 was the introduction of the Value Added Tax (VAT) system across the country. While the decision to implement VAT has been announced, India Inc. seems to be apprehensive of the same. In this article we take a look at the concept of VAT, its implications and the practical problems for implementing the same. In simple terms, VAT is a single multi-point tax on goods and services that is levied across various stages of production and transit, with credit being given for the tax paid at each stage on the value added. Unlike the prevailing system, the tax incident is ascertained at each stage of the process and will be collected at one point. The explanation of the whole procedure is shown with the help of a flow diagram indicating the various stages of the process.

The diagram above indicates that when a manufacturer produces goods worth Rs 1,000 in order to sell in the markets, he pays a VAT of Rs 100 for the same. This is assuming that the VAT rate is 10%. When Wholesaler purchases these goods, he gets a VAT credit of Rs 100, as his purchase price includes the Rs 100 he has already paid to the manufacturer. In the next step, as Wholesaler adds a margin of Rs 100 to the product and sells it to Retailer, Wholesaler is liable to pay a VAT of Rs 110, which is 10% of Rs 1,100 (cost of the article excluding the initial VAT, plus the margin Wholesaler has added). Due to this the cost of the article goes up to Rs 1,210. However, in effect, since Wholesaler has already got a tax credit of Rs 100, his tax outgo is only Re 10.

Retailer, in turn, gets a tax credit of Rs 110 if he buys the goods sold by Wholesaler. Assuming that Retailer includes a margin of Rs 200 on the same product, the price of the product goes up to Rs 1,300 (excluding the VAT already paid) and the resultant VAT is to the tune of Rs 130 (10% of Rs 1,300). However, since Retailer has already got a VAT credit of Rs 110, his VAT outgo is only Rs 20. Thus by the time the product is sold to the end consumer, the total VAT outgo is Rs 130. But at each stage the VAT outgo is clearly defined and hence there is no confusion in the minds of the dealers or the manufacturers.

In simple terms both the dealers are paying a tax, which is dependent on the value they add at their respective value add stages. For example dealer A adds Rs 100 as his margins, he is liable to pay a VAT of Rs 10 i.e. 10% of the value added. The value added here is Rs 100. Similarly dealer B has to pay a tax of Rs 20 as VAT because the value added at his end is Rs 200.

As far as the implications of the VAT regime are concerned, the biggest benefit of the new system is the fact that the entire distribution chain will be brought under the tax net. This is likely to widen the tax net further. Apart from widening the tax base, simplification of the tax structure will benefit manufacturers and traders alike. Currently there are as many as 20 tax slabs in certain states, which are likely to be limited to 5, thus simplifying the taxation procedure significantly.

The implications of the new VAT scheme are even far reaching if one was to consider the fact that this system is likely to force the unorganised sector to pay taxes. Compliance from the upper stages of the whole value chain is likely to force the smaller dealers as well a traders to comply. This will keep a check on tax evasion by smaller traders. While the above-mentioned aspects are mainly operational, there are other benefits like the fact that the cascading effect of taxes will be eliminated to a great extent. Ultimately the end consumer will be benefited the most, as a low cascading effect is likely to rationalise prices of goods purchased.

The good news however ends there. VAT is yet to be implemented and in a country where there are different lobbies opposing the same, it may be a while before there is consensus regarding this issue. Already the implementation schedule of VAT has been postponed to June from April 2003. This indicates the immense pressure the government is facing regarding this issue. However if we look deeper in to this issue, there are concerns, which need to be addressed. Firstly sales tax administration is under the purview of the state governments and VAT is meant to be administered uniformly across all states. This means that states will have to conform to a single VAT system, whereas, currently they have different laws governing sales taxation in different states. Hence there has to be a way to circumvent this problem in order to implement VAT.

Also, the implementation of VAT entails the gradual removal of central sales tax (CST). Thus, the revenue short fall the states are expected to incur is to be compensated by the government in stages. The short fall could be a large amount, which the government is likely to reimburse in the following manner Ė 100% of the loss in the first year, 75% in the second and 50% in the third. Also while the principle of VAT is clear, states are free to frame their own rules and procedures to implement the VAT system. This is likely to create differences in the way VAT is implemented across states. Thus the very purpose of implementing a uniform VAT system may be defeated.

Governmentís motive regarding VAT is clear and to a certain extent it has been forced by the World Trade Organisationís (WTO) policies. Since India is a signatory to the WTO, we are in a way obliged to conform to global standards regarding taxation. The issue before the government now is how soon it is able to implement the VAT system in the country after taking all the states into confidence. This, however, may be easier said than done. There needs to be a little more clarity on the issue of VATís effect on different industries. It will be a wait and watch game till then.

Equitymaster requests your view! Post a comment on "VATís coming?". Click here!

1 Responses to "VATís coming?"

MOhammad Ali

Nov 8, 2017

One of then most prominent policy decisions that the government announced in Budget 2018 in UAE. It's good for country but not for business, suddenly come that kind of reform its headache for business but don't worry we are here serving one kind of VAT software that help you to make business transaction easier.

Equitymaster requests your view! Post a comment on "VATís coming?". Click here!

More Views on News

BSE Sensex Surges 707 Points; BHARTI AIRTEL Among Top Gainers (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

The BSE Sensex Surged 707 Points; BHARTI AIRTEL Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms